Amid Rebate Debate, Marketers And Agencies Seek Common Ground

Agencies and clients might have their disagreements, but the relationship isn’t as bad as it’s sometimes depicted in the press – at least according to an Association of National Advertisers (ANA) survey of 126 members and 105 agencies showing that by and large there’s a lot of trust between the two and relationships are strong.

But the survey identified some notable sticking points, generally revolving around compensation and communication.

One of the biggest causes for concern, said ANA President and CEO Bob Liodice, is the value both agencies and clients place on procurement – a marketer-side function that evaluates and tries to maximize the value provided by the media agency. Only 47% of clients strongly agreed or agreed that procurement helps the client-agency relationship. Ten percent of agencies felt similarly – and 71% disagreed or strongly disagreed.

“That’s a pretty dismal number,” Liodice said. “It speaks volumes that, despite the level of focus on the client-agency relationship in procurement, the number is as low as that. It’s a wakeup call that the entire supply chain needs to get back to the table and make it better.”

Marc Strachan, US VP of on-premise strategy and multicultural marketing at Diageo (owner of Guinness, Smirnoff and Johnnie Walker, among others), understands why procurement has gotten a bad rap.

"Procurement is a poisoned word," he said. "The procurement department plays a huge role in making sure a client gets the best value in investment spend." Agencies, however, hear this and think they've run into a unit whose raison d'etre is to cut their fee.

The problem occurs when procurement is driven predominately by saving money. “If the primary value is to shave costs, you get into unproductive ways of conducting business,” Liodice said. Often, procurement functions aren’t manned by people with marketing backgrounds, but by people who’ve worked trading commodities like oil or cotton. “You can’t treat oil and advertising the same way,” Liodice said.

Strachan agreed that having procurement staff experienced in marketing helps smooth the relationship. "There’s a great opportunity for clients to look at procurement through another lens," he said. "And that’s making sure the team that interacts and interfaces with agencies has agency background and experience."

Still, brands are inevitably motivated to cut costs. Look no further than Procter & Gamble, which in its recent earnings call said it hoped to save $500 million by trimming its agency roster.

And this pressure puts a continuous squeeze on agency margins, which have dwindled significantly in recent years. This decline has led to open secret practices, like the tendency for agencies to request kickbacks from vendor partners – rebates that aren't always revealed to clients, and which could, when brought to light, create friction between agencies and clients.

Strachan cautioned, however, against painting the entire agency world with the same brush. "If there were a few bad apples that have caused issues with clients, that doesn’t tarnish the entire industry," he said, adding he isn't concerned the rebate issue is a trend. Still, he hoped for more discussion on the topic.

"We all need to be concerned that our business practices are best practices and ethical practices," he said. "That furthers the trust and partnership between clients and agencies."

This issue became superheated at the ANA Media Leadership Summit in March, when former Mediacom CEO Jon Mandel railed against the practice. The ANA subsequently did damage control, and though the survey was completed in February – before Mandel’s red-blooded speech – Liodice downplayed the impact secret kickbacks might play.

“Yes, we still have some issues in the briefing process and in compensation,” he said. “The fact is, regardless of those issues, the relationship is strong and the belief in the strategic partnership remains strong.”

Nevertheless, the still-raging debate (Omnicom, Publicis and IPG had to field related questions during their respective earnings calls) underscores that compensation remains a heady issue. The majority of agencies and clients agreed or strongly agreed that agency fees are an important consideration in the relationship – but while 72% of clients agreed or strongly agreed compensation was fair, only 40% of agencies felt similarly (about a third agreed, a third neither agreed nor disagreed and a third disagreed).

This is another discrepancy that the ANA and its peers are going to have to deal with. Some salves like performance-based compensation seem great in theory, but the survey indicates at best a lukewarm response from both sides of the table. Liodice said it’s difficult finding the right performance metrics and it’s also difficult determining whether an agency can be accountable to those metrics.

Additionally, there’s a risk the agency might hone in on microtargets to meet certain performance incentives at the expense of the overarching goal. “The problem is sometimes these contracts get to be so complex and laden with so many areas of qualification, it becomes difficult to see the forests for the trees,” Liodice said.

At the same time, marketers need to ensure that their agencies are driving business results.

"We’ve always worked off of the understanding that I am paying for a service, and that service is to help me grow my business," said Strachan. "Performance-based bonuses or additional praise for work because you won a Cannes or Golden Lion? If my business isn't growing, that's a challenge. Performance-based contracts need a lot more dialog and discussion."